Case Study 3 - No incentive for the NRP to earn more

The changing situation

(Some of the tax credit amounts date to pre-April
2001. This should not affect the totals by more than about £1
or so).

This article looks at the child support paid by a low-earning non-resident
parent as his earnings overtake those of his partner, while hers stay
the same.

Stage 1

Just after separation, he is living alone. He
is an "absent father", paying child support. He isn't entitled
to any benefits or tax credits, so may not be able to afford to share
the care of his children.

Stage 2

The NRP has a new partner. She has a young child
(it doesn't make any difference here whether it is also his child).
He works. She works and earns more than him. They are entitled to
claim Working Families Tax Credit (WFTC). They have to use childcare
for the child because there is no one left at home to look after the
child. But they can claim some of this back from the WFTC scheme as
childcare tax credit.

Stage 3

He gets a pay rise and so now he earns as much
as her. She continues to work and earns the same as before. They still
claim WFTC and childcare tax credit.

Stage 4

He gets another pay rise and so now he earns
more than her. She continues to work and earns the same as before.
They still claim WFTC and childcare tax credit.

The specific amounts assumed in this case are:

His net income starts at £120 per week, increases (stage 2)
to £140 per week, then increases again (stage 3) to £160
per week

Her net income is £140 per week throughout this case study

Their individual working hours per week: 30

Childcare cost per week: £100

Stage 1 - he is living alone

This is quite a typical case. Most NRPs earn less than the mean
NRP income, and well under the national average male full time earnings.

He is not entitled to any sort of benefit or tax credit relating
to children - even if he shares the care of his children.

This stage is probably quite plausible - the £10 child support
is much less than a child costs, but the NRP is not wealthy.

(For completeness, this also shows the circumstances of his future
partner, Anne. She has a child, and because she works full time
she has to use childcare.

Their total retained income is £300.25. They have two lots
of housing costs, although whether these amount to more than the
costs of the house they will live in at stage 2 is a different topic.
Besides, Anne may get Housing Benefit & Council Tax Benefit.

This Case Study isn't intended to discuss in detail the implications
of merging households and ending up with less money. That is just
shown here for completeness).

Stage 2 - he has a (higher earning) working partner with
child

The NRP now has a (working) partner. They have to use childcare
because they are both working.

He earns less than his partner. Remember that NRPs tend to earn
less than the average full time male income. NRPs, on average, are
somewhat poor people, not rich deadbeat dads. (Although some are
rich deadbeat dads!)

Their combined retained income has dropped from £300.25 to
£234.25 - but at least they they have each other! (They sometimes
wonder whether they should continue to claim to live apart - this
is "living together as man and wife fraud").

But Arnold intends to "better himself". He intends to
earn lots more and make life better for Anne and Anthony (and perhaps
even Brenda too). Macho pride? So what?

He is paying much less than half of the researched regular expenditure
on Brenda. (He may not believe this - but he is!) It is the same
amount that he was paying at stage 1 when their combined retained
income was £66 more than it is now.

Stage 3 - he now earns the same as his new partner

He gets a pay rise. He now earns the same as his partner.

He pays more child support. Of course he does - he has been contributing
far less than half of the researched regular expenditure on Brenda
so far, and now he can afford to pay more.

But look at the retained income of his household. It is precisely
the same as Stage 2! He is earning £20 per week more (extra
hours, extra travelling, extra training, more responsibility &
accountability) but he, and Anne, and Anthony, have nothing
to show for it!

(They continue to discuss whether to claim to live apart - or even
actually to separate! The child support would drop to £15,
and they would be £81 better off in total retained income).

Betty is happy - "look Brenda, your daddy is working much
harder and earning lots of extra money, and your child support has
increased by £9 per week".

(Perhaps Betty doesn't ask why Arnold has earned £20 per
week more net, is no better off himself, and she is just
£9 per week better off. But we should ask!)

Stage 4 - he now earns more than his new partner

He gets another pay rise. He now earns more than his partner.

He pays yet more child support. Of course he does - he has been
contributing far less than half of the researched regular expenditure
on Brenda so far, and now he can afford to pay yet more.

But look at the retained income of his household. It is £2
per week more than stage 3! He is earning another £20 per
week more (extra hours, extra travelling, extra training, more responsibility
& accountability) but he, and Anne, and Anthony, have £2
to show for it!

(If they separated the child support would drop to £20, and
they would be £94 better off in total retained income).

Betty is still happy - "look Brenda, your daddy is working
even harder and earning even extra money, and your child support
has increased by £7 per week".

(Perhaps Betty doesn't ask why Arnold has earned £20 per
week more net, is virtually no better off himself, and she
is just £7 per week better off. But we should ask!)

Compared with stage 1:

Arnold is earning £40 net per week more.

His household is £2 per week better off.

Betty & Brenda are £16 per week better off.

Hm!

Conclusions

The first conclusion is that the marginal increases in child support
as the NRP earns more sometimes suck! (And this was based on earning £40
net more. He would have had to earn even more gross!) This
is the reformed scheme, not the current scheme which can be even worse!

Another conclusion is that Anne and Arnold need to be happy living together,
or at least save a lot on housing costs, because it is costing them quite
a lot (in extra child support and reduced WFTC) to do so. This shows one
of the poisonous social effects of means-tested benefits (or tax credits)
- does society really want to provide incentives for Anne and Arnold
to continue to live apart, or at least claim to? The interaction with
child support simply makes the nasty effects even worse.

But the real conclusion is that having big steps in the formula such
as the 0% / 50% / 100% contributions of WFTC to net income screws people
up to an incredible degree. It is incompetent legislation to make such
a small change in circumstances have such a big final outcome. It can
only cause resentment, and cause people to behave badly. Who, in Arnold's
situation, would even bother? Why shouldn't Arnold say "stuff
it, why bother to try to earn more?"

References

[1] The following statement in the CSA Reform White Paper will probably
haunt the government!

"Tax credits ... The new tax credits can be paid to either
partner. Tax credits will be used to assess maintenance where the nonresident
parent is the principal or only earner. If the nonresident parent and
his new partner are earning exactly the same, only half of the tax credit
will be used in assessing child support liability. In cases where the
new partner is the principal earner, we will ignore any tax credits
regardless of whose wage packet they are paid into. This reflects the
way that Family Credit is treated in the current child support system."